Leonardo Pisa of Italy
Leonardo Pisano (Fibonacci) (1170 – 1250) was a popular Italian mathematician of the Medieval Period that made significant contributions to the history of finance. He was the first person to develop the value analysis concept (retracement) that compares the economic value and the contractual cash flow. Influenced by the economic evolution in the Mediterranean, he made lifetime discoveries that had a profound impact on public finance and capital enterprise in Europe. In his arithmetic book, ‘Liber Abaci’, Fibonacci expressed his discoveries of the mathematical concepts in commercial trade. He developed mathematical concepts of interest rates, calculation of profits, conversion of currency, and investment returns. Using an example of a soldier who is given an annuity by his king, Fibonacci demonstrated the significance of considering the value of the currency at different points in time in determining the interest rates.
The present-value theory is viewed as the foundation block of the banking and credit industry in Europe. In the problem “Barter Merchandise and Similar Things,” he asserted that assets with identical cash flow must have the same economic value. This conception influenced today’s economic concept of ‘Law of One Price’ which posits that a product has to sell for the equal price in all locations. He also placed a great emphasis on the superiority of the Hindu-Arabic number system in calculating financial concepts. The Roman numerals were way too tedious for basic tasks such as division and multiplication, and would sometimes contradict its rules. For example, the simple number 1,999 in the Hindu-Arabic translated to MDCCCCLXXXXVIIII in Roman numerals.
Giovanni di Cosimo-Medici and Medici Family
The Medici Bank (1397-1494) was Europe’s most powerful financial entity in the 15th Century that came up with accounting rules for the banking system such as double- entry bookkeeping, book transfers, and bills of exchange. The bank exchanged currency, gave loans, held deposits, and had a network of business activities (Ferguson, 2008). It is accredited for its banking accounting contributions in the financial sector. The bank made significant improvements in the general ledger systems and developed the entry system for tracking credits, deposits, withdrawals, and debits.
Under Giovanni di Cosimo guidance, the bank had to find ways of circumventing the church’s prohibition of charging interest. It started charging a commission for converting currency through sale ‘bills of exchange’. The bills of exchange were documents of proof that a depositor had paid a certain amount of money to the bank and as such had monetary value. The Medici made profits by paying back the money from a different Medici branch at the exchange rate of the local currency at the time of presenting the bill. To ensure profitability, a time frame was set (usance) between the issuing of the bill and cashing; for example, the usance between London and Florence was three months. The Medici Bank’s control of Florence, arts, and political development during the Renaissance period has shaped the modern bank’s (such IMF and World Bank) role in influencing the leadership and policies the leadership of world countries.
Francisco Pizarro and Johnson Hawkwood
Francisco and Hawkwood provided pronounced finance lesson in the laws of demand and supply. Sir Johnson Hawkwood (1320 -1394) was an Italian mercenary who participate in several 14th-century conflicts in Europe. Following the plague that killed almost half of Europe’s population, he took advantage of the shortage of manpower and formed a mercenary army. Because the demand for manpower was high, he charged exorbitant fees to his customers propelling himself to riches within a very short time. Francisco Pizarro, on the other hand, was a Spanish Conquistador, who concurred the Inca Empire (1524-1526) that was rich with precious metals. Large-scale extraction of silver from Inca (Bolivia) did not make Spain richer but, instead increased the price of goods and services, hence the financial concepts of demand, supply, and inflation (Ferguson, 2008). Pizarro did not understand that money is worth what other people would give in exchange for it rather than the amount that one has. When money is supplied in excess, its value depreciates because purchasing power increases, and people spend more which means they don’t bargain for lower prices, and trader’s hick prices to exploit the trend. This concept is used in today’s notes and coins mode of exchange that gives a promise value even though they are virtually worthless. By trusting the banks not to print excess notes and coins, the value of money is built on people’s trust.
John Law of Edinburgh the Dutch East India Company
John Law (1671 – 1729) was responsible for the creation of France’s first central bank, the French Banque Generale, and is associated with the 1720 bubble of the Mississippi Company. A colonial venture in Panama wiped out the money of many citizens of Scotland, which prompted hoarding of gold and silver by banks and citizens hence diminishing velocity of money in the economy. He was the first economist to suggest the introduction of paper money whose worth would be derived from the value of the land that the government possessed. The law’s idea was adopted by France to help solve the debt crisis that was unfathomably 21 times higher than its annual tax revenues. A central bank was created where Law collected gold coins from citizens for paper money that was readily redeemable based on the value of the gold at the point of withdrawal. He poured the money into the Mississippi Co. and engineered a false sense of a well-established trade (Ferguson, 2008). When the Banque Royal collapsed, so did Mississippi, an event that showed how the central bank is an authority with powers to prevent or influence a financial disaster.
The Dutch India Company, founded in 1602, was the first multinational company in history to issues stock (Ferguson, 2008). The company funded hundreds of ships simultaneously for investors and shared profits between them to minimize risks. The Anglo-Dutch War led to the collapse of its enterprise and investors lost all their money. The company changed financial capitalism by introducing limited liability for shareholders. The largest investor doesn’t suffer the same losses as the smaller investors. Conversely, lessons were learned; issuing of new shares to raise more capital and giving relative dividends rather than fixed dividends.
Nathan Rothschild of Germany
Nathan Mayer (1777 – 1836) was a German businessman, banker, and financier who engaged in various business activities that included textile, stock exchange, gold bullion, and also played a significant role in the abolition of slavery. He was a forerunner in the development of the bond markets in Europe, giving greater lessons on the effect of predictions of the market performance on the behavior of the bond markets. During his time sales of government bonds were commonly practiced by European countries to finance wars. He made his fortune by making a false speculation on how the battle of Waterloo between France and Britain would influence the price of bonds.
He misreported the possible outcome of the fight in London and triggering panic in the sale of British bonds at very low rates. It has been often likely that when a government loses a war, the bonds will become valueless. Nathan bought all the sold bonds, a decision that was informed by the intelligence that the British will win the war and the prices of the bonds will go up significantly. In July 1817 the price of British bonds rose by more than 40%, and he sold his holding making approximately 600 million pounds in profits (Ferguson, 2008). In modern finance, opinions and rhetoric on the future performance of the money market is worth expensive. The value of a bond can rise or fall just by influencing the fears and confidences of the market.
Robert Wallace and Alexander Webster
Wallace (1697–1771) and Webster (1708 –1784) were the first pioneers of the modern insurance industry. They were disturbed by the suffering that widows and orphans of ministers went through after the death of the men of their households. Their inventive plan was to make fellow ministers contribute a particular regular premium into a fund (Scottish minister widow fund) that would pay interest of the money to the families of the deceased (Ferguson, 2008). To determine premiums, the two calculated the number of possible widows and orphans that would be left behind if death happened by determining the life expectancy of all ministers. The concept became popular, and many joined the fund hence making it easy to determine how much a widow would be paid out at the end of the year. Wallace and Webster’s calculations were precise and almost perfect, hence ushering in a true insurance fund. From 1748 to 1778 the capital of the Scottish Ministers Widows deviated within a 5% margin only. It was the first insurance fund to cover life and general insurance liabilities using the mathematics of probability.
References
Ferguson, N. (2008). The Ascent of Money: A Financial History of the World. New York: Penguin Group.
